Innofactor Plc Financial Statement 2016 (IFRS)

Innofactor closes 2016 with a strong quarter – The maximum purchase price of the Lumagate acquisition reduced by EUR 3.7 million as Lumagate operating margin was weaker than forecasted

Quarter 10–12/2016:

The net sales were approximately EUR 18.0 million, which shows an increase of 42.9%.

The operating margin was approximately EUR 2.0 million (11.1% of the net sales), which shows an increase of 14.2%.

The operating profit was approximately EUR 1.3 million (2015: approximately EUR 1.5 million), decreasing by 9.8% as the net sales were affected by increased write-offs related to acquisitions, in accordance with IFRS 3, resulting in a decrease of EUR 518 thousand (2015: 120).

Year 1–12/2016:

The net sales were approximately EUR 59.6 million, which shows an increase of 34.1%.

The operating margin was approximately EUR 4.8 million (8.1% of the net sales), which shows an increase of 30.4%.

The operating profit was approximately EUR 2.3 million (2015: approximately EUR 2.5 million), decreasing by 8.3% as the net sales were affected by increased write-offs related to acquisitions, in accordance with IFRS 3, resulting in a decrease of EUR 1,884 thousand (2015: 480).

Innofactor’s operating cash flow in the review period remained strong and was approximately EUR 3.1 million.

Oct 1–Dec 31, 2016

Oct 1–Dec 31, 2015*

Change

Jan 1–Dec 31, 2016

Jan 1–Dec 31, 2015*

Change

Net sales, EUR thousand

17,992

12,590

42.9%

59,616

44,452

34.1%

Operating margin (EBITDA), EUR thousand

1,990

1,742

14.2%

4,831

3,705

30.4%

percentage of net sales

11.1%

13.8%

8.1%

8.3%

Operating profit/loss (EBIT), EUR thousand**

1,326

1,470

-9.8%

2,332

2,542

-8.3%

percentage of net sales**

7.4%

11.7%

3.9%

5.7%

Earnings before taxes, EUR thousand**

1,196

1,395

-14.3%

1,920

1,935

-0.8%

percentage of net sales**

6.6%

11.1%

3.2%

4.4%

Earnings, EUR thousand**

957

1,116

-14.2%

1,536

1,548

-0.8%

percentage of net sales**

5.3%

8.9%

2.6%

3.5%

Net gearing

70.2%

34.1%

70.2%

34.1%

Equity ratio

35.8%

56.9%

35.8%

56.9%

Active personnel on average during the review period***

589

416

41.6%

532

409

30.1%

Earnings per share (EUR)

0.0292

0.0334

-12.5%

0.0467

0.0475

-1.6%

*) During the third quarter of 2015, an error in the assessment of projects was detected in the Group company concerning the period of January 1–June 30, 2015, for the year 2015 as well as previous financial periods. The assessment error was corrected for the above-mentioned periods in accordance with IAS 8: 41–42. The total effect of the error was a decrease of approximately EUR 552 thousand in the operating margin. Of this, approximately EUR 238 thousand was for the year 2015. Adjustments and their effects on the Group figures are described in more detail in the attachment to the interim report for January 1–September 30, 2015, which was published on October 20, 2015.

**) In accordance with IFRS 3, the operating profit for October 1–December 31, 2016, includes EUR 518 thousand (2015: 120) in depreciations related to acquisitions, consisting of allocations of the purchase price to intangible assets. Adjusted for the said depreciations, Innofactor’s operative business profit for the review period of October 1–December 31, 2016, would have been EUR 1,844 thousand (2015: 1,590), the operative business result before taxes EUR 1,714 thousand (2015: 1,515), the operative business result EUR 1,371 thousand (2015: 1,212), and the operative business result per share EUR 0.0419 (2015: 0.0375). The business result of the review period January 1–December 31, 2016, includes EUR 1,884 thousand (2015: 480) in depreciations related to acquisitions, consisting of allocations of the purchase price to intangible assets. Adjusted for the said depreciations, Innofactor’s operative business profit for the review period of January 1–December 31, 2016, would have been EUR 4,216 thousand (2015: 3,022), the operative business result before taxes EUR 3,804 thousand (2015: 1,935), the operative business result EUR 3,043 thousand (2015: 1,548), and the operative business result per share EUR 0.0926 (2015: 0.0471).

***) The Innofactor Group monitors the number of active personnel. The number of active personnel does not include employees who are on a leave of over 3 months.

Innofactor’s future outlook for 2017

Innofactor’s net sales and operating margin (EBITDA) in 2017 is estimated to increase from 2016, during which the net sales were EUR 59.6 million and operating margin was EUR 4.8 million.

CEO Sami Ensio's review: In 2016, we became the number one provider of Microsoft-based solutions in the Nordic Countries. Also, Q4/2016 net sales and operating margin were the highest in our history.

In the last quarter of 2016, Innofactor continued profitable growth in accordance with its strategy and had the best quarter in its history, as measured in both net sales and operating margin. The growth of net sales in the last quarter of 2016 was 42.9 percent (net sales EUR 18.0 million) and operating margin (EBITDA) was EUR 2.0 million (11.1 percent of the net sales), which shows an increase of 14.2 percent since the previous year.

In the entire year 2016, Innofactor’s net sales grew 34.1 percent (net sales approximately EUR 59.6 million). The operating margin (EBITDA) was approximately EUR 4.8 million, which shows an increase of 30.4 percent since last year. The cash flow from business activities in 2016 remained strong and was approximately EUR 3.1 million.

On October 9, 2016, Innofactor reached an agreement on acquiring the entire share capital of the Lumagate group from the company’s key persons. Lumagate is one of the leading Nordic IT companies, which operates in the Microsoft ecosystem and focuses on offering cloud-based solutions. The company has over 70 employees in three different countries: Sweden, Norway and Denmark. Due to the acquisition, Innofactor expanded into Norway and strengthened its position significantly in Sweden and Denmark. Innofactor considered that, after the acquisition, it had reached the position of the number one Microsoft-based solution provider in the Nordic Countries, as defined in its strategy. Innofactor's vision from now on is to be the leading implementer of cloud solutions and digitalization in each of the Nordic Countries.

However, in 2016, Lumagate's net sales, operating margin and cash flow in the last quarter were significantly weaker than the estimates at the time of signing the deal. Unfortunately, this also has a negative impact on Innofactor's figures for 2016. Corrective actions to improve the situation were started immediately after the problems were noticed and the organization in Norway went through a major reforming in February 2017. Lumagate Sweden’s organization will be renewed during March 2017 and Lumagate Denmark will be merged with Innofactor in Demark in April 2017. In addition Lumagate group functions will be combined with Innofactor. These actions are expected to improve the net sales, operating margin and cash flow starting from the second quarter of 2017 at the latest.

As the Lumagate's operating margin was significantly smaller than estimated in 2016, the maximum purchase price of Lumagate changed and is now approximately EUR 6.8 million, whereas it was EUR 10.5 million previously. This means that the possible additional purchase price is EUR 2.1 million at the maximum and, should it realize, will be paid only in 2019 (with the company shares as a default). Despite the decrease in Lumagate net sales and operating profit in 2016, we consider the result, due to the lowered maximum purchase price of EUR 3.7 million, to positively affect Innofactor's value to shareholders.

Innofactor is still actively looking for new strategic partnerships in the Nordic Countries. The Group’s goal is to grow both organically and through acquisitions.

Strategy and its realization in the review period

Innofactor is the one of the leading implementers of cloud solutions and digitalization in the Nordic Countries. Innofactor has the widest solution offering and leading know-how in the Microsoft ecosystem in the Nordic Countries. Innofactor has over 600 enthusiastic and motivated top specialists in Finland, Sweden, Denmark and Norway. Innofactor's customers include over 1,500 companies and public administration and third sector organizations. During the years 2017–2020, Innofactor will primarily strive to unify its offering in the Nordic Countries in its selected areas. This may happen either through organic growth or selected acquisitions.

Innofactor's mission: We empower organizations and people to make a difference in the digital world.

Innofactor's vision: We are the leading implementer of cloud solutions and digitalization in each of the Nordic Countries (Finland, Sweden, Denmark and Norway).

Innofactor's strategy for achieving this vision includes:

The best Nordic professionals in the Microsoft ecosystem

The leading offering in cloud solutions and digitalization

A proactive, value-adding and flexible delivery model

Spearhead customers in selected fields in the Nordic Countries

Innofactor's long-term financial goal is to grow profitably:

To achieve annual organic growth of approximately 20 percent in 2020 at the latest

To achieve approximately 20 percent operating margin (EBITDA) in relation to the net sales in 2020 at the latest

To keep the cash flow positive and to secure solid financial standing in all situations

We believe that we can achieve the 20% organic growth by following means:

In the Nordic Countries, we will focus on those fields and customer segments, which have great growth potential in digitalization and implementing cloud services. Social services and healthcare along with wellbeing services are an example of a field in which we will focus strongly in 2017 and coming years.

We will improve sales of our products and services to existing customers in order to compete for an increasing share of the budget the customers are using for digitalization and to develop customer relationships in long term.

We will invest in using modern digital marketing methods to improve acquiring of new customers and to strengthen the customers' image of Innofactor as the leading Nordic implementer of digitalization and cloud services, as well as to improve our sales.

In addition to what was presented above, we believe that we can achieve the 20% operating margin by following means:

We will move the focus in our offering more and more to our own products and productized services, which ease our customers' transfer to cloud services and maintenance. Thus, we can continue to offer our customers better services and greater added value, while strengthening long-term customer relationships.

We will improve the skills of our own specialists, so that our customers will see significant added value in their know-how as compared to our competitors and will be willing to pay a rate that is higher than the field's average.

We will develop our flexible delivery model, which enables fast added value, in such a way that it will further improve customer satisfaction. In the development of our delivery model, we will focus on as efficient planning of the work as possible, while minimizing unnecessary work that will not provide added value to the customer. At the same time, our invoicing rate will improve.

In the Nordic level, we will focus on gaining synergies that provide cost savings, for example, by implementing in 2017–2018 the cloud-based Nordic Microsoft Dynamics 365 for Operations ERP system.

Innofactor's net sales on the review period of January 1–December 31, 2016, grew by 34.1% and a significant part of this was based on inorganic growth resulting from acquisitions. Innofactor's operating margin (EBITDA) in relation to net sales was 8.1 percent in the review period of January 1–December 31, 2016. Innofactor’s operating cash flow in the review period of January 1–December 31, 2016, was EUR 3.1 million positive (2015: EUR 3.9 million).

Innofactor’s financial stability remains to be good. Net gearing at the end of the review period was 70.2 percent (2015: 34.1 percent). During the review period, Innofactor redeemed the EUR 3.2 million hybrid bond, which decreased the equity ratio and increased the net gearing. During the review period, the company took loans for approximately EUR 4.1 million for the acquisition of Cinteros AB and EUR 5.0 million for the acquisition of Lumagate, which together increased the amount of interest bearing liabilities.

Board of Directors' proposal on the dividend

Innofactor is a growing company and intends to use its operating profit on actions promoting growth, for example, on realizing mergers. Innofactor has defined a dividend distribution policy according to which the aim of the Board of Directors is to provide an opportunity for the shareholders to distribute, from the part of the operating margin (EBITDA) that exceeds 10%, the maximum dividend allowed by the state of the business. For 2016, the operating margin (EBITDA) was 8.1% of the net sales. In making the proposal on the dividend, the Board of Directors takes into account the company's financial situation, profitability and near-term outlook.

At the end of the financial period of 2016, the distributable assets of the Group's parent company were EUR 41,020,610.27.

The Board of Directors proposes that no dividend be distributed for the financial period of 2016.

Briefings concerning the financial statement of 2016

On March 7, 2017, at 10:00 Finnish time, Innofactor will hold a briefing concerning the interim report in Finnish for the media, investors and analysts at the company's premises at Keilaranta 9, Espoo. The report will be presented by CEO Sami Ensio and CFO Patrik Pehrsson. The presentations of the briefing will be available on Innofactor's web site after the briefing.

Innofactor will also hold a conference call in English for analysts, media and investors on March 7, 2017, at 16:00 Finnish time. Registrations to tanja.eskolin@innofactor.com before 12:00 Finnish time on Tuesday, March 7, 2017.

Financial releases in 2016

The annual report for 2016 will be published on the company's web site on Tuesday, March 14, 2017.

The Annual General Meeting will be held on Tuesday, April 4, 2017, at 9:00 Finnish time.

Innofactor
Innofactor is one of the leading Nordic providers of cloud solutions and digital transformation. Innofactor has Microsoft Ecosystem’s leading expertise and the most comprehensive offering in the Nordics. Innofactor has over 600 eager and motivated top professionals in Finland, Sweden, Denmark and Norway. Innofactor serves over 1,500 commercial, public, and third sector organizations. In 2011 to 2015, the annual growth of Innofactor’s net sales has been approximately 35%. The Innofactor Plc share is listed in the technology section of the main list of NASDAQ Helsinki Oy. www.innofactor.com